The FDR Framework is the backbone for a 21st century financial system. Under this framework, governments ensure that every market participant has access to all the useful, relevant information in an appropriate, timely manner. Market participants have an incentive to analyze this data because they are responsible for all gains and losses.

Tuesday, January 15, 2013

As reported by the Guardian, the Bank of England's Mervyn King has expressed his moral outrage at the bankers timing their bonuses to minimize the taxes they pay to the detriment of society.

In response, the BBC reports that Goldman has announced that it will not delay it bonus payments (probably increase them at the expense of shareholders to achieve the same after tax bonus for their bankers).

There are two critically important lessons to learn from the row over banker bonuses.

First, the culture of banking has not changed since the financial crisis began on August 9, 2007. Bankers continue to try to maximize their individual pay regardless of the cost to society.

Second and equally importantly, bankers adjust their behavior when market discipline is exerted on them. This point is critically important because it highlights the simple fact that for banks sunshine is the best disinfectant of bad banker behavior.

As your humble blogger has pointed out on numerous occasions, to fundamentally change the culture at banks requires that they disclose on an ongoing basis their current global asset, liability and off-balance sheet exposure details.

With this degree of sunshine into what the bankers are doing, market participants can easily enforce discipline on bad behavior.

By stripping away the veil of opacity, bankers know that there will be a backlash against their activities that are detrimental to society.

From the Guardian,

Sir Mervyn King, governor of the Bank of England, has waded in to the row over bonuses at Goldman Sachs warning it would be "rather clumsy" and "lacking in care" of big banks to attempt to defer bonuses to allow highly paid bankers to pay a lower rate of tax.

Appearing before the Treasury select committee, King told MPs: "I find it a bit depressing that people who earn so much find seem to think that it's even more exciting to adjust the timing of it to get the benefit of the lower tax rate ... knowing this must have an impact on the rest of society, when even now it is the rest of society that is suffering most from the consequences of the financial crisis".

He went on to say that it would be "rather clumsy" and "lacking in care". "In the long run, financial institutions do depend on goodwill from society," said King.

About this blog

A blog on all things about Wall Street, global finance and any attempt to regulate it. In short, the future of banking and the global financial system.

This blog will be used to discuss and debate issues not just for specialists, but for anyone who cares about creating good policies in these areas.

At the heart of this blog is the FDR Framework which uses 21st century information technology to combine a philosophy of disclosure with the practice of caveat emptor (buyer beware).

Under the FDR Framework, governments are responsible for ensuring that all market participants have access to all the useful, relevant information in an appropriate, timely manner. Market participants have an incentive to use this data because under caveat emptor they are responsible for all gains and losses on their investments; in short, Trust but Verify.

This blog uses the FDR Framework to explain the cause of the financial crisis and to evaluate financial reforms like the ABS Data Warehouse.